Apple and Retail Disease

NEW YORK ( TheStreet) -- Retail is in trouble. The industry has been on the endangered species list since Amazon ( AMZN) was born and told consumers it was time to start thinking outside the box.

Except consumers took it a step further and stopped visiting the box altogether -- the "big box" stores, that is. As a result, once-prominent retailers have fallen by the wayside such as CompUSA, Circuit City, Media Play and many others on a list much too long to detail here.

What we have left are survivors Wal-Mart ( WMT), Target ( TGT) and to a lesser extent Best Buy ( BBY), which is pretty much on life support at the moment.

But who wants to invest in a business or industry that is merely "surviving?" On Wall Street, what wins are bets made on "thriving" companies.

You would be hard pressed to find a company today that is thriving more than technology giant Apple ( AAPL).

But here's the thing: Apple, which runs the popular Apple Stores seen in local shopping malls and other locations, has not been immune from the retail disease that has plagued the Best Buys and Radio Shacks ( RSH) of the world. Is it time for concern?

In a recent article by TheStreet author Rocco Pendola, he reminded investors why retail was on the brink of collapse. In the piece, Rocco states:

"Radio Shack, Best Buy, even Wal-Mart and Target -- soulless brick and mortar retailers need to stop dipping into the same dead and tired retail toolkits and do something different. Maybe even crazy. Don't let Walmart and Target's relative outperformance fool you. They're as vulnerable as anybody else in the broad space."

After reading Rocco's article, I started to look at my own investment in Apple and wondered if its retail business had become "soulless," particularly in light of its recent admission that the change to its staffing formula was a mistake.

The company said that it would revert back to its previous policy and not allow stores to operate understaffed. Apple was looking for a way to save cost and increase its margins. But it backfired into a public relations issue that it would have rather avoided.

It was not so much the attempt at boosting revenue and increasing margins, but how it was executed -- employees had their working hours reduced with no idea of when that would be reversed. This was the same sort of decision that impacted upon morale at the big boxes, making them "soulless" as Rocco described.

Why did Apple management feel the need to mess with a working formula -- one that even Microsoft ( MSFT) sought to emulate with the opening of its own stores?

Here's what Apple saw:

In its most recent earnings report, the company's retail segment produced $868 million in operating income on revenue of $4.1 billion. That equates to a 21.2% in operating margin, a pretty robust number by any standard. I would imagine even Wal-Mart and Target would drool over this performance. But as we have come to know, what is great for other companies is rarely considered "good enough" for Apple.

However, as great as these numbers were, the company's executives -- particularly CEO Tim Cook and Senior VP of Retail John Browett -- not only saw flattening operating margin, but also an annual decline of 170 basis points. Even more glaring was the fact that over the past 12 quarters its retail segment has seen its operating margins drop from over 25% to 23%.

So clearly Apple felt it had to do something, except it didn't go as planned. Even more remarkable is that in its third quarter, Apple said 17,000 people visit its stores on average per week.

So I wonder if it was worth risking the adverse impact that the decision to reduce staff was certain to have? After all, it is the "customer experience" that has made Apple what it has become today. Though understaffing some stores may have saved on expenses, it seems to have cost Apple a lot more by the mere fact that this option was ever considered -- reversal or not.

The fact is, Apple makes too much money to ever consider something like this, perhaps ever again. It's the largest company in the world with one of the best reputations around as it relates to consumers. Instead, leave the poor decisions and grave digging to the big boxes. Apple, you're better than that.

At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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